Common Factors in Cases of Economic Resurgence

Wed 14th May 2014

The following part of this article in quotations is an excerpt from section 4.7 of “The Role Of Banks in Economic Resurgence”, George T Edwards, the Macmillan Press, 1987, pages 114-117.
“All successful economies, and all successful cases of economic resurgence, are characterised by:
i) A political acceptance of the importance of industry in the national economy;
ii) The political will to act to create favourable financial circumstances and appropriate institutions to help industry flourish;
iii) An organisation which acts as a financial ombudsman which, from a deep knowledge of the circumstances of a particular industrial situation, can approve a company's investment plans (and frequently improving them in the process);
iv) A financial system committed to the national success of its manufacturing industries;
v) Relatively cheap long-term loans for industry from the financial system;
vi) The absence of any nonsensical theories about the 'proper relation' of debt to equity; and
vii) A co-operative and practical approach by government, industry and banks to solve the national economic problem.

All these things have been missing in Britain, where:
i) Successive British Governments have persistently denied the importance of industry in the national economy, with some of ministers foolishly regarding industrial decline as inevitable;
ii) That Government has also consistently acted to improve the profitability of financial institutions, and has ignored industry, creating neither the circumstances nor the institutions which would have helped;
iii) There is no 'financial ombudsman' who could successfully argue industry's cause, hence the British clearing banks are judge and jury in their own cause, and can turn down viable investment projects, knowing there is no court of appeal, and there is no need for even minimal competence in assessing investment projects - no matter how badly the clearing banks treat British industry, the lack of an independent financial assessor of investment projects means there is no need to improve their assessment procedures, for if they turn down a viable project there is no risk that their incompetence will be discovered;
iv) The British Clearing Bank system is quite uncommitted to British industry;
v) There are no cheap long-term loans available to UK industry;
vi) There is an invalid theory supported by the UK Treasury (and often written into bank loan agreements in Britain) about the proper relation of debt to equity in industry; and
vii) Government, industry and banks do not co-operate in the national interest, each seeming to prefer industrial decline and their 'independence' to any attempt at intelligent co-operation.

By contrast, in France:
i) There has been political acceptance of the importance of industry for centuries, going back to the brilliant Colbert;
ii) The political will to favour industrial growth has been amply demonstrated, first, by the nationalisation of the banking system to compel it to serve industry; second, by the creation of the Commissariat du Plan; third by the multitude of financial instruments created to help industry, and so on;
iii) The Credit National acts as the financial ombudsman, giving approval to projects which then qualify for loans which can be rediscounted at the Banque de France;
iv) The French financial system is subordinated to industrial success;
v) French financial policy (like the German and Japanese ones) provides low interest rates on long-term loans to industry, much of it subsidised at below market rates;
vi) There is very little foolish dogma about the proper relation of debt to equity; and
vii) Government, industry and banks all co-operate to help the economy flourish.

Conclusions
A similar paragraph could be produced for the USA, Germany and Japan, but the conclusions are perhaps best tabulated as shown below. The conditions for industrial growth are not present at all in Britain or the USA but are all present in Japan, and nearly completely present in France and Germany, where only a lack of deep economic understanding prevents more rapid growth than these European economies presently enjoy. It is at the very least instructive to note that in the wartime USA of 1938-44, all these conditions were met for that brief period, with miraculous economic results.

Factor

UK

USA

France

Germany

Japan

Political acceptance of industrial importance?

No

Yes

Yes

Yes

Yes

Political will to favour industrial growth?

No

Not yet

Yes

Mainly

Yes

Financial 'ombudsman' to independently assess investment projects?

No

Not yet

Yes

Yes

Yes

Who does it?

No one

No one

Crédit National

Bank advisors

Industrial banks

Financial system committed to industrial success?

No

No

Largely

Mainly

Completely

Cheap long-term loans for industry?

No

No

Yes, subsidised

Yes

Very cheap

Absence of critical debt-equity constraints?

No

No

Yes

Yes

Completely

Co-operative pragmatic approach by

Government?

No

No

Yes

No

Yes

Industry?

No

No

Yes

Yes

Yes

Banks?

No

No

Yes

Yes

Yes

The summary of the situation in the above table also contains the seeds of a solution to Anglo-Saxon relative economic decline in particular and more rapid economic growth to many underdeveloped economies in general. The process of economic resurgence is of course more extensive than simply satisfying these pre-conditions which only provide the foundations for more rapid economic development but not for its fuller achievement.”
Since these observations were made in 1987, several shifts in power between the parties listed in the above table have occurred, and a few of these are commented on below.

On 6th May 1997 in the UK, the Bank of England was given a quasi-independent status by Gordon Brown which established the more lax political control which then formed part of the excessive credit creation and the subsequent credit crunch which worsened the subsequent depression, as is still occurring. When the credit crunch hit in 2008, Mervyn King, the then-Governor of the Bank of England, acted with consummate competence and with Government compliance created £375bn to save the UK’s self-serving banking system. Successive UK governments continued to behave, as they have done since the 1880s (yes, the 1880s) under the clearing-bank-dominated agenda that Britain had a financial policy but no industrial policy. That is, the UK parliament can be relied upon to take whatever measures help the Clearing Banks and the City of London but have no industrial policy. The destruction and diminution of much of British industry, and the increasing share of a slowly-growing national income by an increasingly usurious banking system is the inevitable result of that policy.

The French banking system was largely denationalised during the 1990s and the economic control of the destiny of France was surrendered to the German-dominated ECB from 1 January 1999 with the creation of the Euro. Unfortunately the Germans do not understand Shimomuran wealth creation and the EU survives only because of the immense no-cost credit created support of over two trilllion euros by the ECB to the failing economies of mainly southern Europe.

American inventiveness is at present disguising the relative decline of the USA compared to the rising hegemonic challenge of China. The Obama administration would obviously like to reverse the relative economic decline of the USA and the Western block but have no idea about how to bring that about. Successive Japanese administrations have acted almost treacherously, relying on the American military shield of some Japanese actions while not sharing the insights of Shimomuran economics which provides the great comparative advantage of abundant capital to Japanese industry and erodes the competitive position of the western nations.

The Obama administration, and any democratic presidency that succeeds it, needs to remember and practice the policies which FDR implemented from 1938-44.

On their current showing, if Obama is succeeded by a Republican president, then he or she would probably have the same devastating effect on a weakened American industry that Thatcher had on British industry during the 1980s. The competition between the Western democracies and the China Sea economies is not set in a free market context but is one in which the China Sea economies have the tremendous advantage of abundant low-cost investment capital. Communism plus Shimomuran economics is more than a match for the plutocratic Western democracies practising neo-classical idiocies. Yet if the Western democracies practised Shimomuran economics, and employed all the inventive talents of all of their highly creative people as Abe is trying to do in Japan, then Western resurgence from the credit crunch could be swift indeed.